Meth Laws Hamper Perrigo

December 27, 2005
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ALLEGAN — Due to new controls on the sale of one of its largest product lines, Allegan-based Perrigo Co.’s earnings have declined.

Several states and the federal government have enacted laws in the last year designed to curb the availability of precursor products used in the manufacture of methamphetamines. Chief among those precursors is pseudoephedrine, an active ingredient in many of the over-the-counter cold medicines Perrigo manufactures and packages as store brands throughout the country. As sales of these products have become increasingly monitored and, in some states, restricted, Perrigo’s sales have floundered. It’s unclear what effect the reduction in pseudoephedrine sales has had on the war on drugs, but there’s no mistaking the pinch felt in Allegan.

The company recently released its first quarter performance for fiscal 2006. Revenues are up by 40 percent to almost $320 million, but that includes the sales of recently acquired Agis Industries. Stripping away those figures shows stagnation in Perrigo’s core consumer health-care sales, resulting in earnings falling by more than 26 percent, from $17.6 million in the first quarter of fiscal 2005 to $12.9 million this year.

“As anticipated, we began to realize the impact of the market transition of certain pseudoephedrine-based cough and cold products moving to a merchandising position behind the pharmacy counter,” said David T. Gibbons, Perrigo’s chairman, president and CEO. “We reacted early in the quarter to pull production volumes down to reduce our inventory exposure. The retailers’ shift away from pseudoephedrine products on the shelf resulted in lower cough and cold product sales and put downward pressures on gross margin.”

Sales of consumer health-care products grew a miserly 0.4 percent, from $227.7 million in the first quarter of fiscal 2005 to $228.6 million in this quarter. Gibbons said that other revenue centers such as generic prescription drugs and active pharmaceutical ingredients (API) showed better performance. Nonetheless, those categories and an amorphous “other” revenue category only account for 28 percent of the company’s quarterly sales. Those categories are all new for fiscal 2006. The company got into the generic prescription drug business later in calendar 2005, and added the API sector when it acquired Agis Industries.

Along with the acquisition of Agis came a dip in net worth. While the company added almost $900,000 in assets by taking on the Israeli pharmaceutical firm, it also amassed over $670,000 in new long-term debt (up from $0 last year).

The company is also branching out its product line, in what could be positive and negative directions. Perrigo recently announced a new partnership with SCOLR Pharma Inc. of Bellevue, Wash. That company is an industry leader in sustained-release drugs and dietary supplements. Around the same time, specialty pharmaceutical firm Connetics Corp. of Palo Alto, Calif., announced that it had filed a patent infringement lawsuit against Agis Industries.

In the new partnership, Perrigo will manufacture and package a line of nutritional products that use SCOLR’s patented CDT slow-release technology.

“We believe this agreement with Perrigo validates the strength of our CDT drug delivery platform,” said Daniel Wilds, SCOLR Pharma president and CEO. “Our technology provides the capabilities of the best pharmaceutical controlled delivery systems and applies it to the nutritional market. The combination of SCOLR technology with Perrigo’s marketing and manufacturing expertise should maximize the potential of our CDT-based dietary supplements in the growing nutritional market.”

Perrigo said that shipments of the new products should start in early 2006.

Delaying a shipment date is precisely the motive behind Connetics’ legal action. The company, which creates specialty pharmaceuticals for the dermatology industry, hopes that its lawsuit will cause the Food and Drug Administration to delay until 2016 approval for Agis to manufacture a product that would compete with Connetics’ OLUX, a scalp medication delivered in the form of a topical foam. The company’s patent on corticosteroids delivered in foam expires March 1, 2016. Only then, the lawsuit suggests, should Agis be allowed to market a competitive product.

As a result of Connectics’ lawsuit and provisions of the Hatch-Waxman Act of 1984 (the law that governs competition in generic prescription medications), the FDA cannot approve Perrigo’s application to produce a generic version of OLUX for at least 30 months, unless the patent “is judged to be invalid or not infringed.”

Perrigo spokesman Ernie Schenk said that the 30-month period has now begun. The company does not believe, however, that its application infringes on Connetics’ patent. Therefore it hopes that a judge will decide it can go forward with production of the drug before the 30 months is up. If the judge were to side with Connetics, Perrigo would not be able to proceed until the expiration of the patent in 2016.

Following all of this news, the company announced that it would increase its cash dividend by one quarter of a penny, to 4.25 cents per share. The dividend will be paid on Dec. 20 to shareholders of record as of Nov. 25.    

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